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Disadvantages 

OF  THE 

Federal  Farm  Loan  System 

TO  THE 

Borrowing  Farmer 


An  Article  by 

Norman  Lombard 


vlFOR"^ 


Printed  and  Distributed  by 

Agricultural   Credit  Corporation    of  California 

San  Francisco,  Cal. 

Copyright  1916  by  Norman  Lombard 


Disadvantages  of  the  Federal  Farm  Loan  System 
to  the  Borrowing  Farmer 

This  article  is  intended  to  assist  the  farmer  who  is 
thinking  of  obtaining  a  loan  on  his  farm  to  decide  whether 
it  will  be  better  for  him  to  obtain  his  loan  through  the 
so-called  Federal  Farm  Loan  System  or  to  obtain  a  pri- 
vate loan  through  some  of  the  established  agencies  such 
as  the  banks  or  farm  mortgage  companies  which  make  a 
specialty  of  that  business. 

REQUIREMENTS  IMPOSED. 

First  it  is  necessary  to  consider  some  of  the  requirements  im- 
posed upon  borrowers  by  the  terms  of  the  Farm  Loan  Act. 

In  order  to  secure  a  loan  from  one  of  the  twelve  Federal  Land 
Banks,  hereafter  to  be  organized,  it  will  be  necessary  for  a  farmer 
intending  to  borrow  money  to  join  with-  nine  of  his  neighbors  in 
organizing  what  is  to  be  known  as  a  National  Farm  Loan  Associa- 
tion. The  ten  men  organizing  such  an  Association  must  all  be  land 
owners  actually  engaged  in  cultivating  their  farms  or  must  be 
intending  to  become  such.  Simultaneously  with  organizing  the 
Association  they  must  all  make  application  for  farm  loans  in  accord- 
ance with  the  terms,  of  the  act.  When  these  ten  members  have  all 
completed  their  arrangements  and  their  Association  is  in  working 
order,  they  may  admit  additional  members,  who,  in  joining  the 
Association,  will  be  subject  to  the  liabilities  and  responsibilities 
imposed  upon  the  charter  members. 

Let  us  examine  now  the  liabilities  and  responsibilities  incurred 
in  joining  one  of  these  Farm  Loan  Associations,  that  being  a  neces- 
sary step  in  securing  a  loan  from  the  Federal  Farm  Loan  System. 

MUST  PURCHASE  STOCK. 

First  every  borrower  must  set  aside  5%  of  the  amount  of  hi.^ 
loan  for  the  purpose  of  purchasing  stock  in  the  Farm  Loan  Associa 
tion  of  which  he  is  a  member.  Thus  if  he  secures  a  $2000  loan,  he 
will  receive  only  $1900,  or  95  per  cent  of  the  amount  of  his  loan,  the 
balance  of  $100,  or  5%,  going  to  make  up  the  capital  of  the  Farm 
Loan  Association,  together  with  similar  amounts  contributed  by 
other  borrowers. 

347148 


■  'Eaoli  of.fliese  Ea.rm-Loan  Associations,  of  which  there  may  be 
a  number  in  a  county  or  which  may  extend  over  an  entire  county, 
is  obliged  to  re-invest  all  of  its  capital  in  the  stock  of  the  Federal 
Land  Bank  in  whose  district  the  Association  is  situated.  At  this 
writing  the  location  of  these  Land  Banks  has  not  yet  been  determ- 
ined. There  are,  however,  to  be  twelve  of  these  Banks,  the  business 
of  w^hich  will  be  to  issue  bonds  against  the  mortgages,  the  sale  of 
which  bonds  will  provide  the  necessary  funds  with  which  to  make 
additional  mortgages. 

ADDITIONAL  LIABILITY. 

Thus,  the  situation  of  the  individual  borrower  will  be  that  h? 
will  have  given  a  note  for  say  $2000  secured  by  a  mortgage  in  favor 
of  his  local  Farm  Loan  Association,  of  which  there  must  be  at  least 
ten  members  and  of  which  there  may  be  as  many  as  a  hundred  or 
more.  He  will  have  received  $1900  for  his  mortgage,  the  balance 
of  $100  remaining  in  the  Farm  Loan  Association  and  being  invested 
in  the  stock  of  the  District  Land  Bank.  In  addition  to  the  5%,  or 
$100,  thus  reserved,  on  entering  the  Association,  the  borrower  is 
obliged  to  enter  into  an  agreement  Avhereby  he  shall  be  liable  for 
$100  additional,  this  being  a  provision  similar  to  that  contained 
in  the  law  with  resp^ect  to  ordinary  National  Banks. 

Admitting  that  the  $2000  mortgage  is  sound  and  well  secured, 
this  borrower,  in  order  to  safeguard  himself  against  the  loss  of  this 
$200,  will  be  under  the  necessity  of  ascertaining  that  every  other 
mortgage  made  by  the  Association  of  which  he  is  a  member  is  equally 
sound  and  secure,  as  he  is  liable  to  the  extent  of  10%  of  his  mortgage 
for  the  failure  of  any  of  the  other  borrowers  of  his  Association  to 
make  good  on  their  mortgages.  Thus  if  John  Smith  borrows  from  an 
Association  and  his  neighbor  Will  Green  subsequently  obtains  a  loan 
upon  his  farm  from  the  same  Association  and  then  Will  Green  moves 
out  of  the  country,  leaving  his  mortgage  unpaid,  and  if  there  is  not 
sufficient  security  to  satisfy  the  mortgage,  then  John  Smith  will  be 
obliged  to  come  forward  and  put  in  his  own  cash  to  make  good  his 
share  of  the  deficiency. 

PROTECTION  DIFFICULT. 

The  only  way  that  a  farmer  can  protect  himself  from  this  dan- 
ger, and  it  is  a  very  real  one,  is  to  satisfy  himself  that  every  loan 
made  by  the  Association  is  as  good  as  his  own  and  has  behind  it  a 
man  as  good  as  he  is.  With  new  members  continually  joining  the 
Association,  this  will  be  found  to  be  a  very  troublesome  procedure 


and  if  the  security  offered  by  a  new  member  is  located  in  a  distant 
part  of  the  county,  he  may  find  it  very  burdensome  and  expensive 
to  secure  the  necessary  information. 

And  even  if  the  borrower  takes  this  precaution  and  carefully 
scrutinizes  every  loan  made  by  his  Association  with  the  idea  of 
objecting  to  the  making  of  the  loan  before  it  is  made  or  of  with- 
drawing from  the  Association  in  case  it  is  made,  even  with  all  of 
this  precaution,  he  is  still  not  protected  against  the  possible  loss  of 
the  5%  of  cash  which  has  been  invested  in  the  stock  of  the  District 
Land  Bank,  , 

.  There  are  likely  to  be  a  hundred  or  more  local  Associations, 
each  having  business  dealings  with  the  District  Land  Bank.  If  any 
one  of  these  Associations  should  fail  as  a  whole,  it  would  then  be 
necessary  for  the  District  Land  Bank  to  make  up  the  deficiency  and 
to  assess  the  loss  pro  rata  to  the  various  Associations  owning  stock 
in  the  Bank.  Therefore,  it  is  not  only  necessary  for  the  farmer  to 
inform  himself  as  to  the  safety  (^f.  the  loans  made  by  his  own  Associa- 
tion but  also  as  to  the  safety  of  every  loan  made  by  every  other 
Association  in  the  district. 

It  is  quite  reasonable  to  expert  that  some  of  the  local  Farm 
Loan  Associations  will  sometime  fail,  regardless  of  any  precautions 
that  may  be  taken  and  that  the  District  Land  Bank  mil  therefore 
be  obliged  to  assess  the  loss  to  the  other  Associations  composing  its 
membership.  We  all  know  that  crop  failures  are  not  at  all  unusual 
but  are  one  of  the  hazards  under  which  the  farmer  continually 
lives ;  and  it  is  well  known  that  crop  failures  do  not  affect  individual 
farmers  alone — they  always  affect  groups  of  farmers  located  in  the 
same  neighborhood — and  crop  failures  arise  from  a  large  number 
of  different  causes.  Thus,  about  every  so  often,  there  is  a  failure 
of  wheat  in  Kansas,  due  say,  to  the  cinch  bug  or  to  rust.  There  is 
a  failure  of  corn,  perhaps,  in  Iowa,  due  to  a  late  spring  and  excessive 
moisture.  There  may  be  a  failure  of  the  cotton  crop  in  a  given  sec- 
tion of  Texas  due  to  the  boll  weavil  or  a  failure  to  market  the  crop 
(which  is  equivalent  to  the  same  thing)  because  of  some  world-wide 
war  or  other  economic  disturbance.  There  is  a  failure  of  the  peach 
crop  in  a  certain  valley  in  Georgia  due  to  a  late  frost.  There  is 
failure  in  some  other  section  due  to  a  rain.  Crop  failures  on  a  large 
or  small  scale  are  inevitable  accompaniments  of  the  farming  busi 
ness.  During  such  periods  of  disaster  farmers  are  usually  unable  to 
pay  their  interest  and  frequently  are  unable  even  to  pay  their  taxes. 
Occasionally  the  disaster  is  so  severe  that  the  ordinary  living  ex- 
penses of  the  farmers  are  not  obtainable,  and  sometimes  even  land 


values  are  seriously  and  permanently  affected.  Those  of  us  whose 
experience  runs  back  any  number  of  years  can  remember  numerous 
instances  of  this  kind  and  it  is  reasonable  to  suppose  that  as  history 
repeats  itself  they  will  arise  in  future.  And  when  they  do  arise  and 
losses  occur  every  borrower  in  the  District  must  bear  a  part  of  the 
loss  and  he  cannot  escape  it  by  any  amount  of  diligence. 

Nor  have  we  yet  considered  the  full  danger  to  the  farmer 
growing  out  of  this  liability  feature.  As  each  of  the  twelve  District 
Land  Banks  is  liable  for  the  bonds  of  each  and  all  of  the  other  Dis- 
trict Land  Banks,  it  is  obvious  that  the  failure  of  one  of  these  Land 
Banks  would  cause  a  loss  to  each  of  the  other  banks.  Thus,  the  indi- 
vidual farmer  should  not  only  satisfy  himself  as  to  the  safety  of 
every  loan  made  by  every  Association  comprised  in  his  District, 
but  he  also  should  satisfy  himself  as  to  the  financial  soundness  of  each 
of  the  other  Land  Banks  in  the  entire  system,  which  would  mean 
an  examination  into  the  affairs  of  all  of  the  Farm  Loan  Associations 
comprising  the  entire  system.  This  is  obviously  impossible  to  the 
individual,  the  result  being  that  the  borrower  under  this  system  is 
simply  obliged  to  take  his  chances. 

That  the  picture  here  presented  is  not  overdrawn — that  there 
is  a  possibility,  if  not  likelihood,  that  one  of  the  twelve  Federal 
Land  Banks  will  fail — must  be  admitted,  otherwise  the  framers  of 
the  law  would  not  have  included  the  feature  of  mutual  liability 
upon  the  Land  Banks.- 

INCONVENIENCE  OF  SYSTEM. 

We  now  turn  to  the  question  of  the  inconvenience  of  the  system 
to  the  individual  borrower. 

One  of  the  purposes  of  the  Farm  Loan  Act  was  to  enforce  upon 
the  farmers  of  the  country  a  policy  of  co-operation.  Our  friend, 
John  Smith,  may  not  be  on  good  terms  with  his  neighbor,  Will 
Green.  One  may  think  the  other  is  a  degenerate  and  a  reprobate 
while  the  one  thus  complimented  may  not  like  the  way  the  other 
parts  his  hair.  One  farmer  may  not  like  the  other  because  he  paints 
his  buildings  while  again  the  second  farmer  may  not  like  the  first 
because  he  does  not  paint  his  buildings.  It  is  well  known  that 
neighborhood  jealousies  and  animosities  arise  from  a  number  of 
more  or  less  important  and  relevant  causes.  It  was  therefore  felt 
by  those  who  are  responsible  for  the  passage  of  the  Federal  Farm 
Loan  Act,  that  these  neighborhood  differences  ought  to  be  done  away 
with,  that  the  farmers  ought  to  be  compelled  to  like  and  admire 


each  other,  regardless  of  the  merits  of  the  case;  in  short,  that  they 
should  ' '  co-operate. ' ' 

NEIGHBORHOOD  DIFFERENCES. 

Before  any  loan  can  be  made  at  least  ten  farmer-borrowers 
must  find  themselves  in  sufficiently  friendly  accord  so  that  they  can 
transact  business  together  and  be  willing  to  go  security  on  each 
others'  notes.  An  elaborate  scheme  of  organization  has  been  pro- 
vided. Thus  each  of  these  Farm  Loan  Associations  is  to  have  a 
corps  of  officers,  including  a  secretary-treasurer,  a  president,  etc., 
and  three  of  the  members  of  the  Association  are  to  act  as  a  Loan 
Committee.  It  seems  to  me  that  if  I  were  a  member  of  a  Farm 
Loan  Association,  that  I  would  by  all  means  insist  upon  being  a 
member  of  that  Loan  Committee  because  that  Loan  Committee  is 
going  to  be  supreme  in  its  own  little  realm. 

Every  loan  obtained  from  the  Federal  Farm  Loan  system  will 
have  to  pass  the  scrutiny  of  the  Loan  Committee  of  one  of  the  Local 
Farm  Loan  Associations.  Woe  be  yours  if  one  of  the  members  of 
that  committee  objects  to  having  farm  buildings  painted,  if  yours 
are  painted,  and  woe  to  you  if  you  do  not  happen  to  have  your  hair 
parted  correctly  when  you  appear  with  your  hat  in  hand  before  your 
neighbor  (whom  you  have  perhaps  recently  kicked  off  the  lot)  to 
beseech  the  approval  of  5^our  loan. 

Perhaps  one  of  the  members  of  this  Loan  Committee  will  have 
a  covetous  eye  upon  your  farm.  Perhaps  he  is  himself  anxious  to 
buy  it  at  a  bargain.  Is  it  to  be  supposed  that  he  is  going  to  approve 
your  loan  if  that  loan  will  enable  you  to  tide  yourself  over  your 
financial  difficulties? 

Again,  perhaps  one  member  of  that  Loan  Committee  will  have 
a  son  who  is  anxious  to  marr^^  your  daughter  whereas  you  and  your 
daughter  both  have  other  plans.  Is  he  then  going  to  look  with  favor 
upon  your  loan? 

It  is  not  necessary  to  further  elaborate  as  to  the  situations 
which  are  likely  to  arise  under  this  system.  It  is  well  known  that  the 
detached  and  segregated  conditions  of  country  life  promote  the 
growth  of  petty  feelings  of  jealousy,  envy  and  distrust  and  it  is  only 
reasonable  to  expect  that  human  beings  who  will  be  members  of 
these  Loan  Committees  will  be  governed  in  their  decisions  by  the 
dictates  of  their  sympathies  and  their  personal  feelings. 

If  you  are  a  man  of  any  character,  if  you  have  ever  "stood 
up  in  meeting"  and  asserted  your  beliefs  in  opposition  to  those  of 


others,  if  you  have  ever  shown  any  independence  in  the  conduct  of 
your  business,  if  you  have  any  ideas  which  are  not  in  line  with  the 
hiiradrum  ideas  of  your  neighbors ;  in  short,  if  you  are  a  man  of  any 
character  or  self-assertiveness  whatsoever,  the  chances  are  very 
good  that  you  will  not  be  able  to  secure  the  approval  of  your  loan 
by  the  members  of  the  Loan  Committee  and  you  may  as  well  save 
yourself  the  mortification  and  embarrassment  which  are  sure  to 
result  if  your  application  is  filed. 

NEIGHBORLY  INTERFERENCE. 

However,  let  us  assume  that  the  prospective  borrower  has 
been  able  to  break  through  the  magic  circle  drawn  by  the  Loan  Com- 
mittee of  his  Farm  Loan  Association.  He  is  then  in  the  position  of 
having  received  a  favor,  not  only  from  this  Loan  Committee,  but 
from  all  the  members  of  the  Association  and  he  will  be  expected  to 
conduct  himself  accordingly.  It  should  be  noted  that  the  favor 
which  has  been  extended  to  him_  is  not  a  mere  nominal  one,  as  each 
and  every  member  of  the  Farm  Loan  Association,  including  the 
members  of  the  Loan  Committee,  stand  in  the  position  of  guar- 
antors or  sureties  upon  his  note  to  the  extent  of  10%  of  their  own 
loans.  Each  member  of  the  Association,  therefore,  has  a  personal 
financial  interest  in  the  borrower's  methods  of  conducting  his  farm- 
ing operations. 

If  you  are  a  borrower  and  a  member  of  the  Association,  it  is 
therefore  only  reasonable  that  you  should  expect  your  neighbors, 
who  are  also  members  of  the  Association,  to  take  an  active  personal 
interest  in  the  manner  in  which  you  farm  your  property.  Let  us 
suppose  that  you  intend  to  plant  w^heat  in  the  ' '  old  pasture  lot  south 
of  the  creek";  you  happen  to  mention  the  matter  to  some  of  your 
neighbors  and  the  result  is  that  some  evening  a  member  of  the  Loan 
Committee  of  the  Association  stops  at  your  front  gate  and  remon- 
strates with  you  for  planting  wheat.  That  method  of  farming  your 
land  does  not  meet  w4th  his  approval.  Of  course  there  may  be 
nothing  that  he  can  do  about  it,  your  loan  having  been  approved 
and  the  money  spent.  It  is  not  to  be  supposed  that  merely  because 
you  decide  to  plant  the  old  pasture  lot  to  wheat  that  the  loan  is 
going  to  be  called.  At  the  same  time,  it  would  cause  you  to  feel 
somewhat  uncomfortable  to  think  that  the  other  members  of  your 
Association,  your  benefactors,  were  criticizing  the  manner  in  which 
you  were  conducting  your  farming  operations. 


Or  perhaps  you  ma}^  be  a  progressive  farmer  and  you  may 
decide  to  experiment  witli  some  new  crop.  Perhaps  alfalfa  is  not 
very  generally  grown  in  your  neighborhood  and  you  desire  to  de- 
vote 10  acres  to  an  experiment  with  this  highly  profitable  crop.  You 
purchase  your  alfalfa  seed,  level  up  your  land  and  are  all  ready  to 
plant  your  crop  when  the  President  of  your  local  Farm  Loan  Associa- 
tion drives  up  and  calls  attention  to  the  fact  that  you  are  obliged  to 
make  a  payment  on  your  loan  on  September  first  and  if  you  devote 
that  10  acres  to  alfalfa,  which  the  Honorable  President  doesn't  be- 
lieve in,  you  may  find  it  difficult,  if  not  impossible  to  meet  your  pay- 
ment. Perhaps  the  President  would  not  go  so  far  as  to  endeavor 
to  force  you  to  abandon  your  plans,  but  at  the  same  time  you  must 
admit  that  he  has  some  rights  in  the  matter  because  he  is  financially 
liable  in  the  event  of  your  failing  to  pay  your  interest  and  take  care 
of  your  loan  in  accordance  with  its  terms. 

The  inevitable  result  of  such  a  system  is  going  to  be  that  the 
neighbors  of  every  borrower  from  the  Farm  Loan  System  are  going 
to  have  a  ''finger  in  the  pie."  They  are  all  going  to  make  pointed 
suggestions  as  to  how  the  borrower's  farm  should  be  operated  and 
there  is  going  to  be  more  or  less  unpleasantness  if  these  suggestions 
are  not  acted  upon.  Thus  there  will  be  created  a  situation  which  is 
altogether  distasteful  to  all  independent  and  self-reliant  farmers 
and  the  inevitable  result  must  be  that  if  a  man  wants  to  conduct  his 
farming  operations  in  accordance  with  his  own  ideas  and  without 
interference  from  his  neighbors  then  he  had  better  not  get  mixed 
up  with  his  neighbors  in  any  scheme  whereby  they  appear  to  have 
rendered  him  a  favor  in  making  his  loan  possible  or  where  they 
are  in  the  position  of  creditors  or  guarantors  of  the  payment  of 
his  mortgage. 

We  have  not  yet  discussed  the  functions  of  the  Secretary- 
Treasurer  of  the  Farm  Loan  Association.  This  individual  is  sup- 
posed to  be  a  sort  of  a  little  king  in  his  own  domain.  When  your 
interest  comes  due,  he  collects  it;  if  your  taxes  are  not  paid,  he 
will  come  nosing  around  to  see  what  is  the  trouble  and  if  you  do 
not  comply  with  the  terms  of  your  mortgage  agreement  as  to  the 
cultivation  of  your  property,  etc.,  all  to  his  satisfaction,  you  may 
expect  a  call  from  him  without  delay. 

RED  TAPE  AND  DELAY. 

Now  let  us  consider  the  matter  of  red  tape  and  of  the  time 
consumed  in  obtaining  a  loan  through  the  Federal  Loan  System. 


This  article  is  being  written  in  September,  1916.  I  have  just  had 
a  talk  with  some  of  the  members  of  the  Federal  Farm  Loan  Board 
and  they  have  advised  me  that  they  do  not  even  expect  to  designate 
the  towns  in  which  the  District  Land  Banks  will  be  located  for 
several  months  and  they  do  not  expect  that  instructions  will  be 
issued  for  the  formation  of  Farm  Loan  Associations  for  some  time 
thereafter.  It  is  safe  to  expect,  therefore,  that  this  system  will  not 
even  be  in  shape  to  consider  business  for  at  least  six  months.  Even 
after  the  system  is  inaugurated,  the  machinery  will  move  very  slowly 
indeed  and  very  little  business  can  be  transacted  at  first. 

Supposing,  however,  that  the  system  finally  becomes  thoroughly 
organized  and  sufficiently  equipped  with  clerical  assistants,  land 
examiners,  etc.,  then  prospective  borrowers  should  notice  the  exces- 
sive amount  of  red  tape  necessary  to  be  gone  through  with  in  order 
to  secure  a  loan  from  this  system  and  they  should  contrast  this  red 
tape  with  the  simplicity  of  obtaining*  a  loan  through  the  ordinary 
channels. 

In  the  first  place,  it  will  be  necessary  for  the  local  Farm  Loan 
Association  to  be  organized.  The  Association  will  then  have  to 
elect  its  officers  and  designate  a  Loan  Committee.  Applications 
for  loans  will  then  be  submitted  to  the  Secretary-Treasurer  of  the 
Association  and  if  all  of  the  requirements  of  the  law  have  been  com- 
plied with,  he  will  refer  the  application  to  the  Loan  Committee  who 
will  then  make  a  personal  inspection  of  the  security  offered.  If  the 
difficulties  which  have  been  above  outlined  are  finally  overcome 
and  the  application  is  approved,  the  Loan  Committee  w^ill  then 
forward  the  application  to  the  District  Land  Bank  and  the  District 
Land  Bank  will  then  have  to  send  one  of  its  examiners  to  make  a 
further  examination  of  the  security  and  check  up  the  uses  to  which 
the  money  is  to  be  put,  and  other  details,  as  provided  in  the  act. 
If  the  District  Land  Bank  happens  to  have  any  money  on  hand  and 
the  application  is  approved,  the  Land  Bank  will  in  time  forward 
the  necessary  funds  to  the  local  Farm  Loan  Association  and  this 
Association  will  in  turn  deliver  the  money  to  the  borrower.  This, 
however,  will  not  take  place  until  the  mortgage  has  been  duly  re- 
corded, the  title  properly  searched  and  all  of  the  ordinary  details 
encountered  in  making  a  loan  fully  taken  care  of.  It  is  only  reas- 
onable to  expect,  in  this  connection,  that  this  work  will  go  slower, 
being  handled  by  officials  whose  appointments  are  more  or  less 
political,  and  to  suppose  that  the  individual  borrower's  business  will 


not  receive  the  attention  which  it  now  receives  from,  the  private  insti- 
tutions who  have  a  desire  to  build  up  a  reputation  for  prompt  closing 
of  loans  and  for  good  service  to  borrowers  in  other  particulars. 

PURPOSE  OF  LOAN. 

We  now  come  to  a  consideration  of  the  question  of  the  uses  to 
which  the  money  must  be  put  after  a  loan  has  been  obtained  from, 
the  Federal  System.  The  Federal  Farm  Loan  Act  very  specifi- 
cally states  the  purposes  for  which  money  can  be  expended  by  the 
borrower  and  furthermore  provides  that  if  the  money  is  expended 
for  any  other  purpose  that  the  loan  shall  be  immediately  called. 
The  three  purposes  permitted  under  the  terms  of  the  act  are  roughly 
as  follows : 

1st — For  the  purchase  of  the  security; 

2nd — For  the  equipment  or  improvement  thereof;  and 

3ru — ("this  is  very  important) — For  the  purpose  of  paying  off 
a  loan  which  was  on  the  property  prior  to  the  formation  of  the  first 
Farm  Loan  Association  in  the  County ;  or,  if  made  subsequent  to  the 
organization  of  the  first  Farm  Loan  Association,  one  which  was 
made  for  one  of  the  other  two  purposes  above  outlined. 

It  is  to  be  noted  that  if  any  borrower  expends  any  of  the 
money  obtained  from  the  Farm  Loan  System  in  the  payment  of  a 
doctor's  bill,  in  the  payment  of  a  store  bill,  in  the  payment  of  living 
expenses  while  his  trees  or  vines  are  coming  into  bearing  or  for  any 
of  the  numerous  purposes  for  which  borrowers  are  obliged  to  have 
money  other  than  those  specifically  enumerated  in  the  act,  then  his 
loan  will  be  due  and  payable  at  once.  Nor  is  this  all.  If  he  has  a 
loan  on  his  property  which  loan  was  made  subsequent  to  the  organi- 
zation of  the  first  Farm  Loan  Association  in  his  county  and  if  any 
portion  of  the  proceeds  of  that  loan  was  used  for  any  unauthorized 
purpose,  then  that  loan  will  not  be  subject  to  refund  through  the 
Federal  Farm  Loan  System.  Thus,  let  us  say  that  on  June  1st,  1917, 
the  first  Farm  Loan  Association  was  organized  in  the  prospective 
borrower's  county.  Let  us  suppose  that  sometime  after  that  date 
the  borrower  incurred  some  unusual  expense,  such  as  a  doctor  bill 
for  the  sickness  of  some  member  of  his  family,  or  the  payment  of  a 
judgment  for  damages  or  for  some  other  purpose.  He  goes  to  his 
local  banker  and  borrows  this  money,  perhaps  taking  up  a  mort- 
gage which  he  has  on  his  property  at  that  time  and  executing  a  new 
mortgage  for  the  entire  amount.  It  should  now  be  noted  that  this 
mortgage  can  never  at  any  future  time  be  refunded  by  a  loan  from 


the  Federal  Farm  Loan  System  for  the  reason  that  the  loan  intended 
to  be  refunded  was  made  subsequent  to  the  organization  of  the  first 
Farm  Loan  Association  in  the  county  and  a  part  of  the  proceeds 
thereof  was  used  for  purposes  not  specifically  authorized  in  the  Farm 
Loan  Act. 

ADDITIONAL  RULES. 

Now  this  is  no  doubt  a  hardship  to  some  borrowers  as  the  loan 
intended  to  be  refunded  in  the  case  outlined  might  be  abundantly 
secured  and  much  safer  than  some  of  the  loans  which  meet  with  the 
technical  requirements  of  the  act.  However,  it  is  necessary,  in  the 
conduct  of  so  large  a  farm  loaning  system  as  is  contemplated  under 
the  Farm  Loan  Act,  to  have  some  arbitrary  rules  of  which  this  is 
merely  an  instance.  As  the  operation  of  the  system  develops  and 
additional  experience  is  gained,  it  will  become  necessary  to  adopt 
additional  rules  which  will  be  found,  while  in  general  sound  and 
equitable,  to  work  hardship  in  many  cases  and  to  preclude  many  bor- 
rowers from  qualifying"  for  Federal  farm  loans. 

RULES  STRICT  AND  RIGID. 

Before  leaving  this  phase  of  the  subject,  it  should  be  noted 
that  the  rules  laid  down  in  the  Farm  Loan  Act  as  to  the  payment 
of  interest  and  taxes  promptly  on  the  day  when  due  are  very  strict 
and  rigid.  Many  farmers  frequently  have  occasion  to  hold  their 
crops  off  the  market,  expecting  a  higher  price  later,  or  to  hold  their 
cattle  off  the  market  in  order  that  they  Can  be  put  into  proper  mar- 
ket condition  and  the  ordinary  mortgage  company  or  bank  which 
lends  money  upon  farm  lands  is,  as  a  rule,  perfectly  willing  to  agree 
to  the  propriety  of  such  proceedings  and  to  adopt  a  very  liberal 
attitude  toward  borrowers  in  assisting  them  in  the  convenient  work- 
ing out  of  these  financial  arrangements. 

However,  when  your  Uncle  Sam  goes  into  business,  he  is  not 
permitted  to  consider  individual  requirements  but  is  obliged  to  con- 
duct his  affairs  in  accordance  with  strict  rules  laid  down  in  black 
and  white.  It  is  therefore  necessary  that  borrowers  who  are  con- 
templating securing  loans  through  the  Federal  Farm  Loan  System 
should  take  every  precaution  in  advance  to  make  sure  that  they 
will  have  their  money  ready  exactly  on  the  day  when  due,  other- 
wise they  will  not  only  find  themselves  embarrassed  through  calls 
by  their  neighbors,  asking  them  to  pay  up  their  delinquencies,  but 
they  will  also  find  themselves  in  imminent  danger  of  having  their 
loans  declared  due  and  payable. 

10 


CONSERVATIVE  POLICY. 

The  Federal  Farm  Loan  Board  is  proceeding  with  conservatism. 
They  take  the  position,  which  is  undoubtedly  sound,  that  this  system 
must  be  made  absolutely  safe  beyond  any  question,  the  convenience 
of  borrowers  being  a  secondary  consideration.  Undoubtedly  this 
is  the  only  policy  to  pursue  as  any  disaster  to  the  Farm  Loan  System 
as  a  whole  would  be  most  unfortunate  for  the  farmers  of  this  country 
and  would  discredit  them  for  all  time  to  come  in  the  minds  of  in- 
vestors and  financiers,  so  that  it  would  be  an  exceedingly  difficult 
problem  for  the  ordinary  farmer  to  secure  any  loan  upon  his  prop- 
erty upon  any  terms.  They  have  therefore  wisely  adopted  a  very 
conservative  policy  and  they  are  cautioning  everyone  that  applica- 
tions are  to  be  considered  on  the  most  conservative  basis,  that  the 
strict  requirements  of  the  law  are  to  be  adhered  to,  that  valuations 
are  to  be  based  only  upon  the  income  producing  power  of  the  land 
and  that  only  successful  farmers  can  be  considered  as  applicants 
and  these  only  for  loans  for  reasonable  and  conservative  amounts. 

Now  it  is  well  known  that  the  existing  institutions  take  into 
consideration  the  character  of  the  borrower  when  making  a  loan 
and  if  he  appears  to  be  a  man  of  character,  following  proper  farming 
methods  and  otherwise  inspiring  confidence  in  his  ability  to  pay  the 
interest  and  principal  of  the  loan  when  it  comes  due,  his  application 
is  given  more  liberal  consideration  than  in  the  case  of  borrowers  not 
having  these  personal  qualifications. 

Under  the  Federal  Farm  Loan  System  it  will  be  necessary  for 
the  managers  to  eliminate  the  character  of  the  borrower  from  the 
consideration  of  the  proposition.  It  is  the  land  and  the  land  only 
which  is  considered  in  arriving  at  the  amount  of  money  which  will 
be  loaned. 

AMORTIZATION  LOANS  ONLY. 

The  only  form  of  loan  permitted  under  the  Federal  System  is 
an  amortization  loan,  the  period  being  for  anywhere  from  five  to 
forty  years.  The  amortization  form  of  loan  is  exceedingly  popular  in 
Europe  and  it  will  no  doubt,  in  the  course  of  time,  become  popular 
in  this  country.  However,  there  are  many  borrowers  who  do  not 
desire  to  make  a  loan  of  that  kind  as  they  do  not  want  to  be  obliged 
to  retire  their  loan  by  making  a  small  payment  on  account  each  and 
every  year.  They  prefer  a  flat  term  loan  where  they  know  that  they 
will  have  the  use  of  the  funds  for  a  given  length  of  time,  at  the  end 


of  which  time  they  expect  to  be  able  to  secure  a  renewal  for  the  same 
or  perhaps  a  larger  amount,  which  renewals  of  course  are  not  con- 
templated under  the  amortization  form  of  loan. 

It  should  not  be  understood  that  I  am  advising  borrowers 
against  making  an  amortization  loan.  I  am  a  great  believer  in  the 
amortization  loan  as  I  believe  it  much  better  for  the  borrower  to  be 
compelled  gradually  to  work  himself  out  of  debt  and  much  better 
for  the  investor  to  have  a  constantly  decreasing  loan  and  a  conse- 
quent increasing  margin  of  security. 

However,  if  a  farmer  is  desirous  of  securing  an  amortization 
loan,  it  is  not  necessary  for  him  to  go  to  the  Federal  Farm  Loan 
System  for  such  a  loan  as  the  same  can  be  obtained  from  a  mort- 
gage company  in  almost  any  State  and  no  doubt  other  companies 
will  commence  making  loans  upon  the  amortization  basis  as  soon  as 
they  become  more  familiar  with  the  plan,  and  if  there  seems  to  be 
any  demand  from  farmers  for  loans  on  that  basis. 

THE  RATE  OF  INTEREST. 

It  is  contended  by  some  students  of  the  question  that  the 
farmer  will  be  able  to  secure  a  lower  rate  of  interest  by  obtaining 
his  money  from  the  Federal  Farm  Loan  System  than  he  has  been 
able  to  obtain  in  the  past  through  the  ordinary  channels.  As  to  the 
correctness  of  this  prophecy,  only  experience  can  determine.  There 
are  now  between  three  and  four  billion  dollars'  worth  of  farm 
mortgages  in  this  country.  If  it  is  proposed  to  refund  all  of  these 
mortgages  and  to  issue  Farm  Loan  Bonds  to  provide  the  necessary 
money,  it  will  mean  that  in  the  course  of  time  an  immense  quantity 
of  Farm  Loan  Bonds  will  have  to  be  issued.  Now  it  is  well  known 
that  there  is  only  a  limited  amount  of  money  in  this  country  which 
is  willing  to  accept  less  than  6%  on  its  investment. 

It  is  not  to  be  expected  that  investors  who  have  been  obtain- 
ing farm  mortgages  which  netted  them  from  51/^ %  to  6l^%  interest 
will  consent  to  accept  bonds  bearing  a  lower  rate  of  interest  and 
having  no  better  security.  We  therefore  may  eliminate  this  large 
body  of  investors  from  our  calculations  in  considering  the  market 
which  will  be  available  for  Farm  Loan  Bonds.  This  eliminates  the 
largest  life  insurance  companies,  those  savings  banks  which  have 
been  large  investors  in  farm  mortgages  and  the  majority  of  private 
investors  (few  of  whom  invest  in  large  amounts,  but  whose  large 
numbers  make  up  a  considerable  volume  of  the  investment  capital 


of  this  country).  When  you  have  eliminated  these  three  classes 
of  investors,  you  have  left  a  comparatively  small  number  of  people 
who  can  be  called  upon  to  make  investments. 

It  should  be  noted  that  a  recent  issue  of  joint  notes  of  the 
Governments  of  Great  Britain  and  France  was  offered,  the  issue 
being  only  partially  subscribed,  and  in  this  case  there  were  patriotic 
and  business  reasons  for  purchasing.  Also  a  recent  issue  of  notes 
of  the  Government  of  France,  secured  by  American  collateral,  paid 
investors  5%%.  "What  chance  is  there  then  for  experimental  bonds 
where  the  amount  ultimately  required  will  be  over  ten  times  the 
amount  of  this  French  issue? 

It  is  all  very  well  to  talk  about  how  our  Government  bonds 
sell  on  a  low  interest  basis,  but  it  must  be  remembered  that  the 
amount  of  United  States  Government  bonds  is  comparatively  small 
in  proportion  to  the  amount  of  farm  loans  in  this  country.  Fur- 
thermore, certain  privileges  have  been  accorded  to  the  holders  of 
United  States  Government  bonds,  which  are  largely  owned  by  the 
National  Banks  of  the  country,  in  permitting  these  bonds  to  be  used 
as  a  basis  for  the  issuance  of  currency,  which  privilege  of  course 
does  not  attach  to  the  Farm  Loan  Bonds.  It  is  therefore  absurd  to 
think  that  this  country  will  afford  a  sufficient  market  for  Federal 
Farm  Loan  Bonds  at  the  low  rates  of  interest  which  are  being  talked 
of  to  finance  more  than  a  limited  number  of  farm  loans. 

Even  considering,  however,  that  it  might  be  possible  to  refund 
and  refinance  the  entire  mortgage  debt  of  the  country  into  Farm 
Loan  Bonds  at  the  rate  specified  in  the  Federal  Farm  Loan  Act,  yet 
even  so,  it  is  difficult  to  see  where  the  individual  farmer  will  benefit 
as  he  is  now  able  to  secure  loans  at  an  interest  rate  very  little  if 
any  higher  than  that  which  will  be  necessary  under  the  Farm  Loan 
System  and  which  are  free  from  the  objections  herein  explained. 

It  must  be  remembered  that  the  local  Farm  Loan  Association 
must  have  its  expenses  fully  paid,  including  the  salary  of  a  Secre- 
tary-Treasurer. The  district  Land  Bank  is  obliged  to  charge  a  pre- 
mium in  order  to  cover  its  own  expenses,  the  salaries  of  managers, 
bookkeepers,  clerks,  attorneys,  land  examiners,  etc.,  and  also  a  fund 
to  take  care  of  losses  and  by  the  time  all  of  this  has  been  attended 
to,  it  is  not  to  be  expected  that  the  cost  to  the  borrower  will  be 
much,  if  any,  less  than  the  cost  to  him  if  he  obtains  his  loan  through 
the  ordinary  channels. 

13 


ORDINARY  METHODS  BEST. 

On  the  other  hand  prospective  borrowers  should  consider  the 
many  advantages  which  accrue  to  them  in  obtaining  their  loans 
through  private  mortgage  companies  or  through  commercial  banks 
making  a  specialty  of  farm  mortgages. 

It  will  not  be  necessary  to  elaborate  at  any  length  upon  the 
many  advantages,  upon  the  promptness  with  which  loans  can  be 
considered  and  acted  upon,  upon  the  secrecy  of  the  transaction,  the 
borrower's  business  not  being  a  topic  for  gossip  among  the  borrow- 
er's neighbors,  the  fact  that  loans  can  be  arranged  for  flat  terms 
if  desired  or  on  the  amortization  basis  if  that  plan  is  preferred  b}'- 
borrowers  and  that  partial  releases  can  be  arranged  with  the  mini- 
mum amount  of  ''red  tape"  and  delay  and,  finally,  the  liberality  of 
farm  mortgage  bankers  in  taking  care  of  farmers  during  those  pe- 
riods when  they  are  not  able  to  pay  their  interest  promptly  or  do 
not  find  it  advantageous  because  of  market  conditions  or  for  other 
reasons  to  do  so. 

The  value  of  the  service  rendered  by  the  farm  mortgage  bank- 
er as  above  briefly  outlined,  is  so  well  known  to  experienced  bor- 
rowers that  it  is  not  necessary  to  elaborate  upon  this  feature.  No 
Governmental  institution,  with  which  any  of  us  has  yet  had  any 
experience,  has  been  able  to  operate  with  that  facility,  speed  and 
regard  for  the  interests  of  its  clients  w^hich  we  have  learned  to  expect 
in  our  dealings  with  private  individuals  and  institutions  and  there 
is  no  reason  to  expect  that  the  Federal  Farm  Loan  System  will  be 
any  exception  in  this  respect. 

If  borrowers  desire  to  secure  personal  service,  if  they  desire 
to  be  treated  as  human  beings  rather  than  as  numbers  or  members  of 
some  gigantic  machine ;  if  they  desire  speedy  and  reasonable  service 
and  if  they  desire  freedom  from  interference  by  their  neighbors 
and  from  gossip  which  will  be  sure  to  result  under  the  so-called 
co-operative  plan,  they  should  continue  to  do  business  through  those 
farm  mortgage  bankers  which  are  thoroughly  established,  have 
efficient  organizations  and  which,  in  their  past  dealings,  have  shown 
a  desire  to  consider  the  interests  of  their  clients  in  the  conduct  of 
their  business. 

Americans  have  frequently  been  accused  of  being  a  temper- 
amental people  inclined  to  act  upon  impulse  rather  than  upon  due 
consideration.  However,  the  farmers  of  the  United  States  are 
known  to  be  our  most  substantial  and  conservative  class  of  citizens 
and  those  least  inclined  to  take  impulsive  action.    If  the  farmers  of 


the  United  States  had  been  at  all  active  in  the  agitation  for  a  Federal 
Farm  Loan  System,  there  might  be  reason  to  suppose  that  there  was 
some  real  call  for  such  a  system.  It  is  well  known,  however,  that 
the  Federal  Farm  Loan  Act  is  the  result  of  agitation  by  politicians 
seeking  the  rural  vote  and  by  rural  publications  endeavoring  to 
curry  favor  with  those  from  whom  their  revenue  was  derived.  It 
remains  to  be  seen  whether  or  not  the  farmers  of  this  country  will 
be  misled  into  financial  tangles  which  will  secure  them  practically 
no  financial  advantage  and  which  will  at  the  same  time  embroil  them 
in  quarrels  and  disputes  with  their  neighbors.  For  myself,  I  have 
perfect  confidence  in  the  sound  wisdom  of  the  average  farmer  and 
believe  that  he  will  be  found  patronizing  those  same  old  institutions 
which  have  been  of  the  greatest  benefit  to  him  in  his  period  of 
greatest  need  and  which  have  always  shown  themselves  anxious  to 
render  him  the  best  possible  service. 


INFORMATION  BLANK. 


Agricultural  Credit  Corporation  of  California, 
San  Francisco,  Cal. 

Gentlemen : 

Without  obligation  on  my  part  please  advise  whether  I  could 

probably  secure  from  you  a  loan  of  $ _ for 

years  on acres  of  land  located miles 

(direction ) from  (name  of  town) 

in  the  County  of _ legally  described  as 

follows:     _ 


There  are  acres  in  alfalfa;  acres  in 

vineyard years  old ; „ acres  in  orchard 

years  old ;  balance  as  follows : _ 


I  have  a  water  right  or  pumping  plant  as  follows; 


The  place  is  conservatively  worth  $ The 

buildings  are  worth  $ I  have  a  loan  on  the  place 

now  of  $ ,  obtained  from ~ 

maturing ,  19 ,  and  bearing per  cent 

interest.    I  do live  on  the  place. 

Yours  very  truly, 


Date - Name 

Address _ R.  F.  D.  No. 


UNIVERSITY  OF  CALIFORNIA  LIBRARY, 
BERKELEY 

1 

We 

loans  on 

THIS  BOOK  IS  DUE  ON  THE  LAST  DATE 

STAMPED  BELOW 

Books  not  returned  on  time  are  subject  to  a  fine  of 
^^ly^^^^^'-o^^^^e  after  the  third  day  overdue,  increasing 
to  $1.00  per  volume  after  the  sixth  day.     Books  not  in 
demand  may  be  renewed  if  application  is  made  before 
expiration  of  loan  period. 

or 

ies 

01  mtere 
Loai 

^f^«  8*  im 

on 

the  seria 

Inte 

Liy 

or  semi-i 

Loa 

ments  oi 

)0, 

etc.)  ma 

30- 

lutely  w: 

The 

an 

will  be  t 

we 

pride  ou 
closed  ai 

ire 
ur 

custome 

Use 

i 

Agrici 

20m-l.'22 

iltural   Credit  Corporatic 

m 

of  California 

SAN    • 

FRANCISCO,    •  CALIFORNIA 

UNIVERSITY  OF  CALIFORNIA  LIBRARY 


